Morgan Stanley strategist Michael Wilson, known for his bearish stance throughout 2023, has now turned bullish on the current trajectory of US stocks. Comparing the current rally to the memorable 2019 surge, in which the S&P 500 Index returned an impressive 29%, Wilson suggests the market may have more upside potential ahead. So far this year, the S&P 500 is already up 20%, echoing 2019’s performance over the same period.
The 2019 analogy indicates the possibility of further index gains, according to Wilson’s note to clients. However, he cautiously notes that there are key differences between the two periods. Notably, the Federal Reserve was already implementing interest rate cuts during 2019, while the current market multiple is already approaching a level one turn higher than its peak during that period.
Acknowledging his earlier miscalculation for 2023, Wilson maintains his year-end target for the S&P 500 at 3,900. This prediction implies a 15% drop from the index’s current level of approximately 4,590.
Describing the current market rally as policy-driven and late-cycle, Wilson points to historical examples, such as the 2019 rally, where the Federal Reserve’s decision to pause interest rate increases and ultimately cut rates, resulted in a sharp rise in stocks driven primarily by multiple expansion rather than earnings growth.
The Federal Reserve’s recent rate hike, the 11th increase since March 2022, aims to address inflation and guide it toward its 2% goal. Encouragingly, the data released indicates progress: The Federal Reserve’s preferred measure of inflation, the personal consumption price index, saw its smallest increase in more than two years, and the labor cost index showed its slowest advance since 2021.
Traders are currently pricing in limited chances for further rate hikes this year, with rate cuts likely to begin in early 2024.
Additionally, the optimistic sentiment surrounding the U.S. stock market is supported by Federal Reserve economists’ belief that the country is unlikely to experience a recession in 2023. This sense of a “soft landing” has been instrumental in driving U.S. stocks higher this year. Notably, major financial institutions, including Deutsche Bank and Goldman Sachs Group Inc., have also revised their predictions, easing concerns about a looming economic recession.
While Wilson has adopted a more positive outlook, he remains cautious, calling for broader positive signals across several business cycle indicators, greater breadth and a decline in initial rates before fully adjusting his stance.
As market participants anxiously observe new developments, the trajectory of the US stock market in the coming months remains uncertain, but has potential for continued growth.
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